Chapter 17, Problem 1QQ

To determine

Cause of large increase in government debt.

Answer to Problem 1QQ

Option ‘c’ is the correct answer.

Explanation of Solution

Option (c):

The wars and the related expenditure are the most common reasons which increase the government expenditure. The defense expenditure of any government is priority expenditure. During war period and the subsequent years, the rate of output, production, employment, and consumption would be low. This implies that the revenue of the government would be much less than the Government spending. Thus, the government incurs debts to finance the defense on wars throughout the U.S history. Thus, option (c) is correct.

Option (a):

The recessions are periods of economic downturns which would lead to a decline in the revenue from tax. However, they are not the most common cause of government debt.

Thus, option (a) is incorrect.

Option (b):

The supply side policies of a government which promotes growth along with tax cuts will induce more investment, production, and employment in the economy. Though the immediate revenue cannot be obtained, these policies will ultimately move the economy to a period of progress. The debt incurred due to these policy regulations is also less compared to other causes. Thus, option (b) is incorrect.

Option (d):

The entitlement programs which aim at helping the elderly are part of social security measures adopted by the government. Though this spending is unproductive, it is important for the welfare of the society. However, the spending of the government in this sector is less than the expenditure on other areas. Thus, option (d) is incorrect.